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The Trading Mesh

BATS auctions off the block problem

Fri, 11 Sep 2015 06:38:39 GMT           

This article was originally published at the Fidessa blog, and is reproduced here with permission.
 
By Steve Grob


There has a been a lot of talk about how to trade blocks that are smaller than the LIS waiver but that are still too big to go to regular lit markets. The debate has been ratcheted up by the 4 and 8% dark pool caps that are part of the MiFID II spectre looming above us all. One approach, of course, is to chop your block into smaller pieces with an algo but this is becoming increasingly unattractive in an HFT-dominated world.

Venues like Turquoise have done their bit to help solve for this with their innovative Block Discovery service which has been gaining momentum steadily.

Now it looks like it’s the turn of the clever folks at BATS who have come up with another novel approach to the problem. Its soon to be launched Periodic Auctions Book offers intraday auctions that operate within an EBBO collar. This matches orders on a price/size/time basis through random auctions. What’s particularly cool about its approach is that the frequency of the auction can be dialled up or down to reflect the underlying liquidity in a stock. Because it’s a lit book it will never get tripped up by those pesky MiFID caps and the auction helps protect information leakage that would otherwise occur trading large blocks on a lit market.

Naturally, any innovation in trading depends upon its widespread deployment, but BATS should be credited with an imaginative approach to a real industry problem.

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